Thursday, June 26, 2008

Real Estate Definitions :PITI

PITI stands for Principal, Interest, Taxes, and InsuranceMost homeowners make four housing-related payments each month:

  1. Principal on a mortgage
  2. Interest on a mortgage
  3. Taxes on the real estate owned
  4. Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.

For example, a homeowner with an interest only mortgage does not pay principal each month. And some homeowner's are not required to pay Insurance or taxes into an escrow account if they are borrowing from a smaller lender or are making a larger down payment.

Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead, and a smaller condominium specific policy insuring the interior elements of their condo and the contents.

In some instances the Insurance company ir taxing authority may send the annual bills directly to the homeowner instead of to the lender. If your lender is escrowing these items, the bills must be forwarded to them. Otherwise your escrow account will accumulate, and you will, in effect be doubling your cost. Eventually it will be reconciled, but typically your money will have been held without interest during that time.

But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.

It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

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